About the author

Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

Exposing the minimum wage fallacy — it’s an ironclad law of economics that to stimulate one group (workers) you have to un-stimulate another group (businesses)

In a 2014 letter written by the Economic Policy Institute (EPI) to President Obama and congressional leaders in support of an increase in the federal minimum wage to $10.10 an hour, more than 600 economists apparently agreed with, and endorsed this statement:

Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.

The rising wage floor would generate $144 billion in additional annual wages, which would ripple out to the families of these workers and their communities. Because lower-paid workers spend much of their extra earnings, this injection of wages would help stimulate the economy and spur greater business activity and job growth.

Seems almost like economic magic right? Through a government edict in the form of an artificial price control (minimum wage law), we can stimulate the entire US economy and increase national income, prosperity, and jobs!

And here’s the latest from EPI on the pending increases in state minimum wages next week:

At the beginning of 2018, 18 states will increase their minimum wage, providing more than $5 billion in additional wages to 4.5 million workers across the country. In a majority of these states, minimum wage increases (ranging from $0.35 in Michigan to $1.00 in Maine) are the result of legislation or ballot measures approved by voters in recent years.

According to the narrative of minimum wage advocates like EPI, that $5 billion in additional wages will get spent by low-skilled workers on goods and services, and with the power of a mythical multiplier that spending will ripple through the economy and magically stimulate the entire economy, create jobs, and bring about prosperity!

But here’s a question that never gets asked (or answered) by EPI and minimum wage supporters: Where will the $5 billion in additional wages come from? While thinking about this overlooked question that reveals an important economic fallacy, I was reminded of a similar economic fallacy illustrated by Henry Hazlitt’s famous essay on the broken window, which exposed the economic fallacy of the “blessings of destruction.” Using Henry Hazlitt’s essay as a template (which is actually based on Bastiat’s original essay on the broken window fallacy from 1850), I’ve written a new essay below to expose what might be called the “blessings of the minimum wage fallacy” on the eve of the 18 minimum wage increases schedule to take place next week.

The Blessing of the Minimum Wage Fallacy

From Henry Hazlitt’s Economics in One Lesson, we learn that “the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” Let us begin with a simple illustration: the 18 minimum wage hikes that will take place next Monday on January 1.

As a result of 18 state laws mandating that minimum wage workers will get paid $0.35 (in Michigan) to $1 an hour (in Maine) more on January 1, a young teenage worker named Alex working full-time at a small neighborhood pizza restaurant in Maine would make $160 in additional income every month (ignoring taxes). Alex would spend that additional monthly income of $160 at local merchants on items like food, clothing, footwear, Uber rides, movies, computer games, and electronics items. The local merchants who receive that $160 from Alex’s additional spending now have additional income and profits every week, and they can spend some of that additional income and profits on goods and services. Alex’s additional monthly income, therefore, ripples through the local Maine economy with an amazing multiplier effect that almost magically increases spending and income throughout the local economy. The pro-minimum wage crowd points to these many positive income effects from Maine’s pending $11 an hour minimum wage and Alex’s additional income, and many might even suggest that a minimum wage far above $11 an hour would create even greater and more positive benefits for workers like Alex and the local merchants who would be the beneficiaries of an even higher minimum wage. For example, EPI suggests that a $15 an hour federal minimum wage would lift wages for 41 million American workers.

But let us take another and closer look at the situation. The minimum wage crowd is at least right in its first conclusion about Alex’s spending, which is just a small part of the much larger $5 billion in additional wages and spending EPI estimates for next year. The public policy of artificially raising wages through government fiat will mean more business and billions of dollars in greater sales revenues for local merchants around the country. The local merchants will be no more unhappy to learn of the magical spending from 18 minimum wage hikes in 2018 than an undertaker to learn of a death.

However, we haven’t yet considered the situation that will now face hundreds of thousands of merchants and small business owners next year, including Alex’s boss – Mrs. Alice Johnson who owns the small pizza restaurant in Bangor where Alex works. As a result of Alex’s good fortune to receive $160 in extra income every month (and nearly $2,000 during the entire year) as a result of government fiat, his boss and sole-proprietor Alice Johnson now has $160 less every month (and $1,920 for the year) because she has to pay Alex out of her own income or profits. The Johnson family now has to cut back on their household spending by $160 every month that they would have spent on food, clothing, Uber rides and electronics products at local merchants. Alex’s gain of $160 each month comes at the direct expense of the Johnson family, who are now worse off in the same amount that Alex is made better off. (And if Mrs. Johnson employs more minimum wage workers than just Alex, she and her family are worse off by $160 per month, and $1,920 per year, for each worker.) If we consider that Alex and the Johnson family are a part of the same local community in Bangor, the community’s income hasn’t changed – rather, there’s only been a transfer of income of $1,920 per year from the Johnson family to Alex; but no net gain in community income, wealth, jobs, or prosperity has been achieved.

For the entire state of Maine, the $80 million in higher wages that EPI’s estimates next year as a result of the $1 an hour increase in the state’s minimum wage have to come from somewhere or someone. And that “somewhere” or “someones” are the thousands of local merchants in Maine like Mrs. Johnson who will be made collectively worse off by $80 million in 2018.

The people in the pro-minimum wage crowd think narrowly of only two affected groups from minimum wage hikes: Alex, the minimum wage worker, and the merchants that gained his business from his artificial increase in income. The minimum wage advocates forget completely about the third parties involved, namely small business owners and their families like the Johnsons in Maine, and the local merchants that now lose their business because the labor costs for small businesses have been artificially increased by government fiat. Minimum wage advocates will easily see Alex’s increased income and spending because it is immediately visible to the eye and easy to calculate ($5 billion next year according to EPI, and $144 billion annually if the federal minimum wage is increased to $15 an hour). They fail to see the lost income and subsequent reduction in spending by the Johnson family that otherwise would have occurred – because it’s less visible and harder to calculate.

The minimum wage example above exposes an elementary fallacy about its alleged positive income effects. Anybody, one would think, would be able to avoid that fallacy after a few moments thought. Yet the minimum wage fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by labor union leaders, by editorial writers and newspaper columnists, by progressive politicians and progressive think-tanks, by learned statisticians using the most refined techniques, and even by professors of economics in our best universities who sign statements in support of the minimum wage. In their various ways, they all perpetuate the minimum wage fallacy.

The minimum wage supporters see almost endless benefits despite the economic destruction that characterizes minimum wage laws. They see miracles of multiplying prosperity, increased income, and more jobs coming from minimum wage hikes, a form of economic magic enacted in state capitals, by city councils, and the federal government. But once we trace the long-term effects of such public policy on all groups in the economy, and analyze both what is seen and what is unseen, we should easily understand that the minimum wage cannot, and will not, have overall positive effects. At best it can only transfer income from one group (business owners like Mrs. Johnson above and/or their customers in the form of higher prices) to another group (low-skilled, limited-experienced workers), but with no net gain. It’s an ironclad law of economics that to stimulate one group with public policies like the minimum wage, protective tariffs, or farm subsidies, another group in the economy has to be equally “un-stimulated.” In the case of the 18 increases next week in state minimum wages, the EPI’s estimate of $5 billion in additional wages will stimulate low-skilled workers next year by the exact same amount that it will “un-stimulate” merchants, businesses, business owners and their families in those 18 states – by $5 billion.

When one considers all of the long-term effects on all groups that would result from minimum wage laws: the economic distortions, the misallocation of resources, the loss of employment opportunities for low-skilled workers and the lifetime consequences of not gaining work experience at an early age, and the businesses that close or are never opened, one can only come to one conclusion: the minimum wage law is a very bad and very cruel public policy that makes local communities and the entire economy overall much worse off, not better off.

MP: Groups like EPI that support increasing the minimum wage do a great job of addressing the benefits of higher wages to low-skilled workers, but then completely ignore the costs of those artificial wage increases. That is, they never answer the most important question of all, posed above: Where will the $5 billion in additional annual wages from the 18 minimum wage hikes next year come from?

For example, in a 60-page document released earlier this year by EPI’s senior economic analyst David Cooper, “Raising the minimum wage to $15 by 2024 would lift wages for 41 million American workers,” there is extensive coverage on every page of the estimated benefits of artificially higher wages ($144 billion annually) to various workers by demographics (age, gender, race/ethnicity, education, family status, children, geography, etc.) that would result from a $15 an hour federal minimum wage. But you won’t find a single sentence in the 60-pages of text that explains where the $144 billion will come from if the federal minimum wage is increased to $15 an hour!

There’s not a single mention in the EPI report of the word “business” except for a reference to a $15 minimum wage “spurring greater business activity and job growth.” There’s also not a single mention of what should be relevant terms like “higher prices,” “labor costs,” “profits,” “adjustments” or “reduced hours” that would give us some idea of the costs of a $15 an hour minimum wage, who pays those costs (businesses), and how those higher costs will offset the benefits. And that’s the essence of the “blessings of the minimum wage fallacy” that EPI has fallen prey to — a $15 minimum wage sounds like good public policy only when you count all of the blessings (benefits) to workers while ignoring the costs to businesses.

Bottom Line: We learned from Bastiat and Henry Hazlitt that broken windows and other forms of destruction can’t increase a community’s overall income, employment, and economic prosperity. Likewise, neither can the 18 minimum wage hikes scheduled to take place on Monday have overall, positive net economic benefits next year. Any public policy looks good when you look merely at the immediate effects, but not the longer effects; when you consider the consequences for just one group (workers in the case of the minimum wage) but for all groups (businesses), and only emphasize the benefits (to workers) while completely ignoring the costs (to employers). But that’s not sound economic logic or objective economic analysis on the part of groups like EPI; rather it’s pure partisan political advocacy for an economic fallacy that violates the ironclad law of economics described above. Or as Milton Friedman described it in 1966, support of the minimum wage is “monument to the power of superficial thinking.”

Update: As Not Sure points out in the comment section, there is an additional cost to employers when the minimum wage increases because of the 7.65% payroll tax imposed on employers for Social Security and Medicare. Therefore, the $5 billion in higher wages next year for minimum wage workers would actually cost their employers $5.3825 billion.

If we could target the coffee can/mattress savers, then there would be an increase in economic activity. We just need to first destroy faith in the viability of banks to get people to save cash outside the financial system.

No serious investor, as in anyone with a brain, saves money in Banks anymore as the yield is less than inflation and has been for well over a decade.Which explains why so much more private money is in the markets these days.

Can we view this situation as taking money from those with a higher savings rate and giving it to those with a lower one?

You can hypothesize anything you like, but is your hypothesis true? It doesn’t appear to be true. Minimum wages doesn’t really transfer money from one group to another and what little transfers it does is transferred from one low wage group (the low wage group that is now unemployed) to the group that remains employed.

This could, in effect, increase economic activity through decreased total savings

Decreased savings means less capital available for loans. Economic activity isn’t increased by transferring economic activity away from investment spending into consumption spending. In fact, in the long run, increasing consumer spending at the expense of investment spending, reduces economic growth.

Minimum wage law is just another redistribution-of-wealth scheme of the level-peggers on the Left, this time transferring wealth from the job creators,–80% of jobs created by small businesses–to the job takers, their employees. [High-paid jobs are supplied by large corporations who don’t create most of the jobs in an economy and that won’t be affected by minimum-wage law.] The long-term consequences of minimum-wage law, therefore, are to reduce the number of jobs available, a small business owner either firing one or two people to save money or not hiring new workers, and doing without. One day this whole problem will be moot as robots will fry your hamburgers and serve them to you, make your pizzas and put them in the oven, pick your tomatoes, and stock the shelves in grocery stores. And businessmen will be more willing to speed up the process of robotizing their businesses simply to avoid the bullshit meddling by the Left vis-a-vis human workers. I’m old enough to remember that when we pulled into a gas station immediately someone immediately appeared to pump our gas and wash our windshield. Now we’re forced to pump our own gas and wash our own windshield because of the minimum-wage law. A gas-pumper and windshield cleaner wasn’t worth what leftists were forcing the owner of the station to pay.

I can see in the near future when we stay in hotels we’ll have to make our own beds and clean up the room in the morning. No more house cleaning maids.

I too remember getting gas pumped and windshields washed. In fact many young people, myself included, learned some valuable job skills and gained work experience working at those low paying jobs. A low, easy to reach step on the ladder – now gone forever.

In the aggregate, national savings is equal to national investment. The macro version of this would be the above mentioned Johnson Family buying new equipment for their business with their savings.

One could make the argument that savings are “too high,” but since no one really knows what an ideal rate of savings is it’s hard to back up that argument. What we do know is that it must at least cover depreciation and anything higher will promote economic growth.

“Where will the $5 billion in additional annual wages from the 18 minimum wage hikes next year come from?”

Doesn’t part of the employment tax that employers pay come directly from the employer, and not from the employee’s wages? In that case, wouldn’t $5 billion in additional wages actually cost employers more than that?

Hospitality / Foodservice is the top employer especially at or near minimum wage, but in addition to employers share of Social Security one must also consider approximately 3% in workman’s comp, and another 1% in state UI/DI

Additionally where wages are artificially increased by 5 Billion per year that is pre income tax and so on. So we create a 5.3825 Billion per year drag on business owners while providing after tax ish 4 Billion per year benefit assuming all minimum wage workers remain employed which is unlikely.

I forgot payroll expenses are often 10%+ of wages so the 5.3825 is likely closer to 5.5 Billion per year drag.
Think ssi medicare state and federal workmans comp employer matching of employee contributions.
Government gets its cash from both the employer and employee so the 5 billion a year in wage transfer is really 5.5 Billion per year and costs the economy. 0.8 to 1.1 Billion that the government pulls from the wealth transfer before it gets to employee paychecks to be spent.

Economic activity doesn’t raise itself up by its own bootstraps. Only deferred consumption (savings) can provide resources for higher future productivity and greater prosperity. for some unfathomable reason Keynesians don’t ever seem to understand this simple truth.

The increased minimum wage also causes a decline in the low wage working conditions. Employees are pushed to be always producing except during official mandated breaks like the never slowing production line. Way back when I worked in a kitchen in the ’80s, you could get a break between rushes without hassle once you restocked to the line.

A few years ago, my niece had foot surgery and was in a walking boot. The fast food place she worked wouldn’t schedule her till he was 100% since even the boot was thought to cut into her ability to keep the pace and would slow the whole shift.

Actually many welfare programs have income phaseouts and earnings limits. Some create an effective tax rate of nearly 100% at some break points. To keep benefits an employee would have to reduce hours to keep the same gross pay.

While not directly related to the minimum wage the way the 20% deduction works for pass thru businesses means that the deduction is limited to 50% of w-2 wages paid. The limits on the deduction are 20% of total income from the business as well as 50% of w-2 wages paid. So in some sense this encourages small businesses to hire more and pay more as Uncle is paying between 22 and 37% depending on the business owners income.

Raising the minimum wage will primarily impact minimum wage paying businesses, such as fast food. And the primary patrons of fast food establishments are lower income workers. As the fast food restaurants pass on their increased costs, it will impact that group of patrons more than it will higher income patrons. Net result is the minimum wage workers will realize little benefit as prices are incrementally increased to fund their higher manadated wage.

“The minimum wage should be phased out, in conjunction with a phasing out of property zoning and the NAIRU minimum unemployment rate of the Federal Reserve.”

Dr. Perry seems to be calling for a phasing out of the minimum wage, while in most cities a propertied-financial class artificially limits the supply of housing, thus raising housing costs, and while the Federal Reserve insures there are always more job hunters than job openings.

In a candy-coated kum-bi-yah world, I would not support trade tariffs.

That is, a world without militaries, without religion, no national borders, a world without other nations where elites use government to control wealth and income, leading to relatively impoverished masses.

Also a world without domestic property zoning, and other structural impediments we have.

In this lovey-dovey kum-bi-yah world, then trade tariffs would not be a good idea.

But hey, I live in reality.

I think trade tariffs make sense here and now, along with national property taxes, pollution taxes and national sales taxes, and a reduction in payroll taxes and income taxes.

These are somewhat practical alternatives for the world we live in, though I doubt I will see any tax reforms I promote actually come to fruition.

But why it is the “right wing” is for “free markets”….but dead-mute on property zoning?

An interesting response given the only reason you’ve said for supporting tariffs in the past was because of zoning laws. But that’s neither here nor there.

What’s even more interesting is your “pragmatic” response to tariffs (“But hey, I live in reality”) but your decidedly unpragmatic (ie, “candy-coated world”) response to the FDA, push-cart vending, etc.

Some US cities already have limited forms of street kiosks and push-cart vending and food trucks, so yes I am dreaming…but maybe not a pipe-dream. And, of course, travelers know street vending is common many places in the world.

I will concede that the propertied-financial class will defend the market-perversions and profits of property zoning to the hilt.

That being the case, then some other balancing market perversions may be justifiable.

In the US, the arguments are not whether markets should be free, but which market perversions are sacrosanct.

Ergo, in some circles, the minimum wage is bad and property zoning is sacrosanct.

We need to take the argument a little further, for the MW advocates do. Poor people spend all their extra wages, richer people save some of their marginal income. The marginal propensity to save, or the inverse, MP to consume.

This effect is real. But it’s also small. A useful rule of thumb (and it is only a rule of thumb, there are more accurate estimates out there for different income groups) is that the savings rate of the poor is zero, that of higher income groups 15% or so.

OK, so the effect on increasing demand from the MPS is 15% of the extra wages – the amount the poorer people will spend, minus the amount the richer people would have spent, not saved.

Very few indeed of the MW advocates are willing to do this calculation properly.

OK, but that doesn’t end it. Our GDP equation is C+I+G after all, Investment leads to an increase in GDP just as an increase in C, or consumer demand, does. Thus the increased wages for poorer people increasing the size of the economy doesn’t actually work – at least, to the extent that savings fund investment.

Mark does us a favor by exposing the Economic Policy Institute for what it is, a sham organization that ignores economics when it gets in the way of ideological or political goals. I for one doubt that raising the minimum wage much if anything to do with economics – it’s vote buying, pure and simple. The hope is that more voters will benefit directly than will be hurt directly, and that those hurt indirectly will blame others. The real work to defeat such thinking is yet to come; namely, a careful empirical analysis of the extent to which people are hurt by the policy relative to the gains. Tough to do, but essential though likely to be severely questioned if proponents of the minimum wage find that it works for them politically.

Our political system allows people to have input into decisions about which legislation is enacted or not.

One of the most difficult decisions an elected representative has to make is to fight to get their people what they demand they want even if their choice is probably not in their best interest.

The key to helping people make good choices is information and education such as found here at Carpe Diem 🙂

It’s going to be very difficult to tell a minimum wage worker who will now have an extra $14 a week for 40 hours of work in Michigan that next week’s wage raise is not a good idea or in his or her best interest.

“It’s going to be very difficult to tell a minimum wage worker who will now have an extra $14 a week for 40 hours of work in Michigan that next week’s wage raise is not a good idea or in his or her best interest.”

which is exactly why the power to force such things should be kept away from governments.

given the power grab legal plunder, of course people will vote for it. if they get a dollar, they do not care if it did $2 in harm.

this is precisely why markets work and coercive commerce does not.

inadvertently, walt is making precisely the argument against a redistributionist state and for greater property rights.

you cannot just “educate” such people. they do not want to hear it. they want someone else’s stuff, and so long as the state has the power to give it to them, they will elect politicians to do just that.

the only real way to stop this is to take that power away from the state.

“you cannot just “educate” such people. they do not want to hear it. they want someone else’s stuff, and so long as the state has the power to give it to them, they will elect politicians to do just that.”

I think the people at the bottom simply want the laws tilted more in their favor as they believe the laws currently favor those at the top. Trump seems to have quite a following from this group from my personal experience.

A higher MW will likely reduce federal income taxes collected by an amount that should exceed the extra government income from increased payroll tax, since it shifts income to people presumably in a lower, or 0%, tax bracket. That should be factored in.

Of course, it’s likely all moot because low wage-job losses and higher-priced goods and services complicate the math.

Regardless, how do we get presumably well-intentioned policy makers to see that they are actually hurting the very people they are trying to help??

Lower total income tax collections would indicate lower total income, no?

In reality, the most visible effect of a minimum wage hike is to just shift income from one group of low income people to another group of low income people. Effects on higher income folks is less noticeable.

One aspect is always missed or ignored in minimum wage talk. Isn’t it immoral to steal? Which is essentially what all monetary transfer dictates [taxes, MW laws, etc.] from the State are.

Just because A & B can outvote C to use the State to transfer funds from C to them, shouldn’t make it right. But the Left seems to have this fetish with Robin Hood’s ‘steal from the rich to feed the poor’ theme. They can do it by demonizing the Rich, who always make their riches either illegally or immorally.

I wish secondary education would teach more about economics and ethics.

One aspect is always missed or ignored in minimum wage talk. Isn’t it immoral to steal?

This isn’t missed. Minimum wage advocates openly lie about this very thing, accusing business owners of stealing from their employees, as part of the rationalization of minimum wage. So in addition to stupidly believing minimum wage laws transfer money from business owners (which MW advocates stupidly believe has been stolen from low wage workers) to low wage workers, they lie about what business owners are doing.

Workers are hired to create value for sale. Increase hours worked from 20 to 40 and you will likely double value created as well as wages. Increasing the hourly rate likely will not increase value created, any more than raising the rent or electric bill or any other cost of doing business.

But workers cost more than their wage, they cost total compensation. Excess regulation and ACA is likely where their wages have gone.

Voters will not vote wisely until they understand tell how this all works.

The intellectualism of the topic dates back to Keynes, who was trying to get unemployed workers back to work in a situation of low demand and under-utilized productive capacity, and further back to Karl Marx, who wanted workers to get more and bosses to get (much) less.

Incorporating their thought into this means that proponents celebrate a lower savings rate and increased demand and consumption. But less savings means that the cost of capital must go up, and replacing machines as they wear out becomes more expensive, and investing in improved machines also gets more expensive. This can easily lead to a decrease in productivity. Decreased productivity has the good side of increased need for workers, supposedly, and the bad side that the standard of living of those workers goes down.

The intellectual history is even darker than that. If you go back and read the Congressional Record for the Bacon-Davis Act (the act that created a national minimum wage) and the intellectual writing at the time (including Keynes, Fisher, and others), the complaint was minorities and white women were making too much money in the market. Minorities, as they got richer, were having more kids and since white women were working, they couldn’t be having kids. The fear was the “lesser races” would out-populate the white man and weaken America. The minimum wage was passed for the explicit purpose of keeping minorities and women out of the workforce.

1. Who gets unemployed by minimum wage?
2. What are industry and demographic impacts of min wage?
3. Does a minimum wage raise or lower minimum wage incomes? E.g., what’s the sr and lr labor demand elasticity?
4. Do young people miss out on the job training in entry level jobs?
5. Does a minimum wage benefit big tech automators like Amazon?

With all due respect to an article that is well-written and well sourced, the primary idea that there is a minimum wage fallacy perpetuated by the left is in itself a fallacy. In reality, minimum wage acts as a shift of assets from the rich to the poor. An increase in minimum wage just increases that shift. While reasonable people can make arguments about what the minimum wage should be, it protects those people who are least able to protect themselves from those who would take advantage for profit.

A society which had a zero minimum wage would see many people making low wages of a few dollars an hour that didn’t know better and permitted rich employers to take advantage. A society that had a minimum wage of $100 an hour would force many jobs into the informal market. Neither scenario is desired or results in optimal economic growth. The real question is what the minimum wage should be.

As I believe Mr. Perry and others have pointed out before, while the mandated MW can be anything, there will always be a real minimum wage of $0. Workers who don’t get a job because an employer won’t hire them due to having to pay too much will sit at home making $0/hour. Of course, the State will give them money and benefits to sit around but that is another problem that needs fixing.

“In reality, minimum wage acts as a shift of assets from the rich to the poor.”

I have a friend who owns a business that employs mostly minimum wage workers. We’ve talked a number of times about how he manages his business. Regarding wages, he allots a certain percentage of gross sales to labor expenses. Since raising the minimum wage doesn’t do anything to increase his sales, his workers end up working fewer hours.

So- in this case, raising the minimum wage does nothing to shift assets. That’s just one data point, of course, but I’d find it hard to believe his business is the only one that’s run that way.

In reality, minimum wage acts as a shift of assets from the rich to the poor. An increase in minimum wage just increases that shift. While reasonable people can make arguments about what the minimum wage should be, it protects those people who are least able to protect themselves from those who would take advantage for profit.

Interestingly this is the very fallacy Dr Perry et all seek to refute. What you describe is not the reality at all. The reality is that it ends up being a transfer from the relatively poor to the relatively wealthy and weakens bargaining positions of those most likely to be taken advantage of.

What has been described as owner savings is operating capital. I own a small business. My ability to purchase equipment and material, on credit, from suppliers is dependent upon the amount of operating capital the business has available. It’s also called a credit line.

Well, there’s your problem, then. Nobody really cares about what you have to do to keep the business running. Not anybody in the government, anyway. Unless, of course, you have enough excess capital that you can divert some of it towards campaign contributions.

“it’s an ironclad law of economics that to stimulate one group (workers) you have to un-stimulate another group (businesses)”

If this is actually the case (it is not), then this undermines any justification for the acceptance of capitalism by working class people, because it logically follows that the business/capitalist class is actively damaging (‘un-stimulating’) the prospects of the wage-earning class. Figuratively, To get more of the ‘pie’, one group must take a piece from another.

As Adam Smith alluded to in the Wealth of Nations, This is not the case under capitalism. Under a well-functioning capitalist system, we can grow the overall size of the ‘pie’ itself–one need not take from another to increase the size of their piece. The latter assumes a fixed capital stock and a fixed amount of wealth rather than a dynamic, ever-growing amount of capital and wealth–the same assumption the mercantilists and imperialists that preceded Smith wrongly made.

A ‘law’ that Adam Smith himself would have repudiated, and which misunderstands the very thing that separates capitalism from prior forms of economic organization, is certainly not an ‘ironclad law of economics.’

You misunderstand. Adam Smith makes exactly the point Mark makes in the WN (it’s the whole basis of Book V). When one segment is stimulated by the government (eg minimum wage, tariffs, etc), another must necessarily weaken. The growing of the pie comes from division of labor.

That’s not at all the basis for Book V, nor does it make any pronouncements about a zero-sum game between economic classes and sectors. Indeed, Book V is where Smith argues that education should be subsidized by the state so as to prevent the ‘intellectual degeneration’ of the laboring classes that is, he says, the natural consequence of the division of labor. (Arguing simultaneously that most schools should be private). Such a suggestion cuts against, once again, the thesis of this article–if we were to follow the latter’ logic, we would conclude such subsidies would necessarily ‘un-stimulate’ the non-wage-laboring classes. Smith disagrees, once again.

That said, I suggest you re-read the part of education. You’ll notice it’s not quite as black and white as you suggest. Further, reading it in context, you’ll see his defense of public sponsorship of education is lackluster. Most Smith scholars think that bit was added in to appease some of his critics in his University. If you read Smith’s letters, he’s staunchly anti-public sponsorship of education

Well, book IV is actually about free trade, which is really Smith’s other ‘pillar’ of growth, (it’s *not* the division of labor alone that produces growth–free trade is the other necessary ingredient) though he does allow for certain cases where strategic protectionism is beneficial.

But It argues against tariffs and other forms of protectionism, generally, precisely *because* trade is, in his view, *not* a zero sum game. This remains true, for him, even under certain forms of protectionism.

Regardless, I’m respecting the author’s request to leave Smith aside, for the moment. (See my response to him below)

(it’s *not* the division of labor alone that produces growth–free trade is the other necessary ingredient)

Reread Smith. International trade is,/i> division of labor.

But It argues against tariffs and other forms of protectionism, generally, precisely *because* trade is, in his view, *not* a zero sum [sic] game. This remains true, for him, even under certain forms of protectionism.

Right. Free trade is not a zero-sum game. But protectionism is, as Smith repeatedly points out.

Instead of getting bogged down in a discussion of Adam Smith, I’ll just point out that there is a difference between increasing productivity through the effects of specialization and comparative advantage which result in a larger pie, and merely taking resources from one group and giving them to another group which does not – and which is the subject of your quote from the top post above.

You may be reading too much into a simple concept. Compensation that is just arbitrarily given to one group, workers, when they haven’t earned it through increased production, will have to come from someone else. In that sense, there is a fixed pie at any given moment in time. There is no increase when you put money in your left pocket that you just took from your right pocket. That’s the point being made here.

If your principle only applies to a single, static moment in time then it’s a fallacy to draw generalizations from it that apply to a dynamic system that changes over time.

Regarding the claim that workers haven’t ‘earned’ more compensation through increased production, things are not so cut and dry. It would be nice if The price of labor was determined neatly the way the price of other commodities are–but this is not the case. Wages are determined instead by bargaining power and social convention–unlike, say, the cost of steel or oil. Your claim that workers have not ‘earned’ this increase assumes that the pre-existing distribution of bargaining power is already in some kind of ‘equilibrium ‘ and broadly ‘correct’.

This is a very tenuous assumption, given 1.) that economies are never really in equilibrium, and 2.) low-skilled wages are no longer sufficient to cover average health care and housing costs, as one would expect in an ‘equilibrated’ labor market.

Regardless of your view of what The equilibrium distribution of bargaining power is, however, it still remains the case that the zero-sum formulation that forms the basis of this article ‘s argument is faulty, because it draws conclusions about dynamic systems from a principle that only applies to a static system.

There are several factors that contribute to economic growth and improved standards of living, and all contribute to increased productivity. Redistribution of income from one group to another isn’t one of them.

“ 1.) that economies are never really in equilibrium … “

That is correct. Supply and demand tend toward equilibrium at all times but never reach it due to constant changes in a dynamic economy.

“ 2.) low-skilled wages are no longer sufficient to cover average health care and housing costs, as one would expect in an ‘equilibrated’ labor market.”

The cost of housing and health care are irrelevant to the discussion at hand, which is economic growth and the effects of a mandated price floor on the market for low skilled labor. BTW your claims are not enhanced by the use of fancy words like equilibrated. Only use such words when nothing more common will convey the meaning you intend, and that’s not the case here.

“Regarding the claim that workers haven’t ‘earned’ more compensation through increased production, things are not so cut and dry.”

“ It would be nice if The price of labor was determined neatly the way the price of other commodities are–but this is not the case.”

“Wages are determined instead by bargaining power and social convention–unlike, say, the cost of steel or oil.”

Wages – the price of labor – is determined by supply and demand just like every other commodity. Buyers and sellers of labor negotiate the best price they can get just like buyers and sellers for every other good and service.

Who do you think is better qualified to determine the correct price of labor than the parties actually involved in the transaction?

“Your claim that workers have not ‘earned’ this increase assumes that the pre-existing distribution of bargaining power is already in some kind of ‘equilibrium ‘ and broadly ‘correct’. ”

My claim is that workers are currently earning a wage that both they and their employer have agreed is fair. If that were not the case, one or the other would have walked away. A worker must generate more value for his employer than he is paid, or there will be no labor agreement. If an employer must begin paying more for a person’s labor than the value that person produces, they may lose their job, or benefits, or maybe never be hired in the first place.

When I say that workers haven’t earned an increase, I mean that they are not producing more than before, and so there is no reason for an employer to pay them more.

“Regardless of your view of what The equilibrium distribution of bargaining power is, however, it still remains the case that the zero-sum formulation that forms the basis of this article ‘s argument is faulty, because it draws conclusions about dynamic systems from a principle that only applies to a static system.”

The conclusion to be drawn is that without an increase in value to an employer in the form of more output, a worker hasn’t earned an increase in pay. To mandate a higher wage when no more is produced in an economy means that extra pay must come from the earnings of someone else. Ultimately, that someone else is almost always the least capable low skilled workers in the labor force, and consumers who may lose real income due to the higher prices they may have to pay. It is robbing Peter to pay Paul and doesn’t add a dime to economic growth.

Again, built into this argument is the assumption that prior increases in production have corresponded to a one-to-one increase in wages, and that there is an absence of monopsony power in the broader labor market.

But there is ample reason to believe that assumption is false. Since the 1970s, increases in wages have not matched increases in productivity, as they did from 1945-1970.

Furthermore, To my earlier point, unless you’re claiming that the invisible hand is somehow broken, in a labor market that is in a proper equilibrium we would not only expect increases in wages to match increases in productivity, but also to cover the basic cost of living (if the latter was not the case, then Smith was wrong and the invisible hand does not lead to optimal outcomes for all classes of people–something neither you nor I believe).

But low-skilled wages no longer cover the cost of living, which has led since the 1970s to a massive increase in private indebtedness.

Given these facts, it seems likely that there has been a considerable degree of monopsony power in the American labor market for awhile now, which has held down wages below their ‘equilibrium ‘ rate (or, getting outside the jargon, the rate at which wage compensation properly corresponds to labor’s level of productivity) and led to imbalances that a modest increase in the minimum wage might actually be capable of correcting.

There is precedent for this–when Britain introduced a minimum wage just a few years ago it had a minimal disemployment effect, and years later had positive effects on *all* levels of income.

At the very least, things are not so cut and dry as you are making them out to be.

But that goes for those advocating increases in the minimum wage, too– those that do so without thinking about all the nuances and complexities of the issue are bound to err in their conclusions. It is not as simple as ‘hike the minimum wage to twenty dollars! Success!’ One must at the bare minimum acknowledge that the hikes must be modest to avoid being counterproductive, and that it’s best to include exceptions for young workers. And one must never lose sight of the fact that The whole point of a minimum wage policy is to combat the negative effects of excessive monopsony power and bring compensation in line with productivity, not win some ‘class war.’

Unfortunately, there are many empty-headed advocates of it that don’t realize this. The allure of easy, simple and wrong answers is very high.

Again, built into this argument is the assumption that prior increases in production have corresponded to a one-to-one increase in wages, and that there is an absence of monopsony power in the broader labor market.

But there is ample reason to believe that assumption is false. Since the 1970s, increases in wages have not matched increases in productivity, as they did from 1945-1970.

Furthermore, To my earlier point, unless you’re claiming that the invisible hand is somehow broken, in a labor market that is in a proper equilibrium we would not only expect increases in wages to match increases in productivity, but also to cover the basic cost of living (if the latter was not the case, then Smith was wrong and the invisible hand does not lead to optimal outcomes for all classes of people–something neither you nor I believe).

But low-skilled wages no longer cover the cost of living, which has led since the 1970s to a massive increase in private indebtedness.

Given these facts, it seems likely that there has been a considerable degree of monopsony power in the American labor market for awhile now, which has held down wages below their ‘equilibrium ‘ rate (or, getting outside the jargon, the rate at which wage compensation properly corresponds to labor’s level of productivity) and led to imbalances that a modest increase in the minimum wage might actually be capable of correcting.

There is precedent for this–when Britain introduced a minimum wage just a few years ago it had a minimal disemployment effect, and years later had positive effects on *all* levels of income.

At the very least, things are not so cut and dry as you are making them out to be.

But that goes for those advocating increases in the minimum wage, too– those that do so without thinking about all the nuances and complexities of the issue are bound to err in their conclusions. It is not as simple as ‘hike the minimum wage to twenty dollars! Success!’ One must at the bare minimum acknowledge that the hikes must be modest to avoid being counterproductive, and that it’s best to include exceptions for young workers. And one must never lose sight of the fact that The whole point of a minimum wage policy is to combat the negative effects of excessive monopsony power and bring compensation in line with productivity, not win some ‘class war.’

Unfortunately, there are many empty-headed advocates of it that don’t realize this. The allure of easy, simple and wrong answers is very high, for people of all political-economic stripes.

low-skilled wages are no longer sufficient to cover average health care and housing costs, as one would expect in an ‘equilibrated’ labor market.

No. Nothing in economics predicts such an outcome. Total compensation is the marginal product of labor in a competitive market. One would not expect wages “be sufficient to cover average health care and housing costs,” since wages are not determined by such.

The whole point of the ‘invisible hand’ is that market forces will naturally tend to provide optimal outcomes for all classes of society; in labor’s case, it will allow wage-earners to earn enough to subsist and thence continue to provide their services.

If the marginal product of labor is such that it produceswage compensation below subsistence levels, then either the notion of the invisible hand is false, or we have an instance of market failure.

But it’s also not only about how much labor produces, or only the supply of labor. Wages are unique in that they are largely determined by bargaining power, and The distribution of bargaining power is not solely determined by the value a marginal worker adds to production, though that is a factor. It is also influenced by social conventions, institutional factors like the power of unions, and, crucially, the pre-existing distribution of bargaining power.

The fact that power plays a role means the conversation is about more than just labor supply curves.

“The conclusion to be drawn is that without an increase in value to an employer in the form of more output, a worker hasn’t earned an increase in pay. To mandate a higher wage when no more is produced in an economy means that extra pay must come from the earnings of someone else. Ultimately, that someone else is almost always the least capable low skilled workers in the labor force, and consumers who may lose real income due to the higher prices they may have to pay. It is robbing Peter to pay Paul and doesn’t add a dime to economic growth.”

Again, built into this argument is the assumption that prior increases in production have corresponded to a one-to-one increase in wages, and that there is an absence of monopsony power in the broader labor market.

But there is ample reason to believe that assumption is false. Since the 1970s, increases in wages have not matched increases in productivity, as they did from 1945-1970.

Furthermore, to my earlier point, unless you’re claiming that the invisible hand is somehow broken, in a labor market that is in a proper equilibrium we would not only expect increases in wages to match increases in productivity, but also to cover the basic cost of living; if the latter was not the case, then Smith was wrong and the invisible hand does not lead to optimal outcomes for all classes of people, and Marx was right instead–something neither you nor I believe.

But low-skilled wages no longer cover the cost of living, which is one factor behind the massive rise in private indebtedness since the 1970s.

Given these facts, it seems likely that there has been a considerable degree of monopsony power in the American labor market for awhile now, which has held down wages below the ‘equilibrium’ rate at which they properly correspond to labor’s productivity, and hence led to imbalances that a modest increase in the minimum wage might actually be capable of correcting.

There is precedent for this–when Britain introduced a minimum wage just a few years ago, it had a minimal disemployment effect, and years later had positive effects on *all* levels of income.

At the very least, things are not so cut and dry as you are making them out to be. But that goes for those advocating increases in the minimum wage, too–those that do so without thinking through the nuances and complexities of the issue are bound to err in their conclusions. It is not as simple as ‘hike the minimum wage to twenty dollars! Success!’ One must at the bare minimum acknowledge that the hikes must be modest to avoid being counterproductive, and that it’s best to include exceptions for young workers. And one must never lose sight of the fact that the whole point of a minimum wage policy is to combat the negative effects of excessive monopsony power and bring compensation in line with productivity, not win some ‘class war’.

Unfortunately, there are many empty-headed advocates of it that don’t realize this. The allure of easy, simple and wrong answers is very high for all sides of this debate.

The major problem is the Democrats ignore all the logic you just explained and appeal to the basic human instincts with just a couple of words:
“Help the poor, Raise the minimum rate”. Most people are economically illiterate and do not analyze the “unintended consequences” of such behavior.

So is the ideal situation no minimum wage? What do you think will happen to low wage workers then? You think their wages will stay the same? I seriously doubt it. Every transaction revolves around the fact that the buyer values more what the buyer is getting than what the buyer is giving. But when you’re at the bottom and time is all you have to give you’ll take what you can get to survive. The owner values your time more than his money up to the point he feels that the profit is not justified by the effort he has to expended. At that point he walks but he has access to capital that the worker doesn’t so he can just try again.
I don’t understand why the author doesn’t believe that if minimum wage is increased for all why wouldn’t the pizza shop owner be selling more pizza.

As mentioned in the story, Alex the minimum wage worker at the pizza restaurant might have more money to buy pizzas/goods/services, but his employer Mrs. Johnson and her family would have less money to buy pizza/goods services. So Alex’s increased spending would be offset by a decrease in spending by Mrs. Johnson and her family. Money has been redistributed, but not increased, so how can the total number of pizzas sold increase? And if Mrs. Johnson tries to raise pizza prices to offset Alex’s higher wages, the number of pizzas sold would likely decrease.

Having been a manager of a privately owned , non franchised pizza shop, I can tell you that the way for the pizza shop workers to get the best value from the time spent at the business is to negotiate a deal to buy an uncooked unmade pizza from the owner at cost. That’s what we used to do, and we ate pizza 3 times a day for a year, at an average cost of $1.50 per large pizza. So we could eat very well on about $2.00 a day. And never do any dishes at home (so no need to buy an electric dishwasher, or much else for the kitchen. Possibly you wouldn’t need a kitchen at all. ) The owner wasn’t bothered as we would make it ourselves, ( 1 minutes effort all up, averaged out )( And as Mark keeps pointing out, the cost of producing food keeps coming down, so 25 years on, the owner would be even less bothered than before. But the real economic miracle was the American made Lincoln Inpinger conveyor ovens. We had 3 running, one on top of the other, and that shop turned over AUD$20,000 a year through the early ’90s. Let the tool do the work for you. When I get some spare time, I’m going to set up airconditioned mobile pizza restaurants on the back of big rig trucks, and service geological exploration field camps. Jamie Oliver has been messing about with the idea.

Maybe another way to examine the question is to look at how Mrs. Johnsons choice of equipment aquisition affects pizza shop productivity. If she buys a Lincoln conveyor oven, the pizza productivity will be very high.( AUD $500 at a recent Sydney auction , not bad considering they start at $12,000 new ) . I’ve seen pizzas exiting ovens at a rate of one every 5 seconds. If a pizza costs 1 minutes wages in total to make ( Let’s say USD $10/ hour divided by 60 minutes = not much, about say about 17 cents. and it sells for USD$5 , well it seems to me you could double the hourly rate of the pizza shop worker to USD$20/ hour, and the price of the pizza would only have to be raised 17 cents to cover the difference. “Dear valued customers, we have doubled pizza workers wages, and to cover the cost we have added a 17 cent surcharge to your pizza. ” You know what, I’m going to open a pizza shop and pay workers $50 / hour, and sell pizzas for $6 each. They’ll be delivering Pizzas in Mustang GT V8s.

First, one has to consider the conditions of the wider labor market–does the pizza shop owner, or say the firms in the local pizza industry, exercise a degree of monopsony power? If he/they does/do, has this power been leveraged in the past to avoid raising wages in line with increases in productivity?

If it has, then the higher labor costs imposed by the minimum wage actually force the wage rate set by the pizza shop owner (or the local pizza industry) to more accurately reflect the actual productivity of labor.

This has the potential to increase the overall output of the pizza shop owner or the local pizza industry, since both maximize their profits when the cost of having an additional worker equals the value of that worker’s output–something that was prevented from happening before due to the imbalance between productivity and compensation.

Furthermore, let’s say the pizza shop owner or the pizza industry deal with the higher labor costs by reducing the number of workers they employ and raising productivity per worker. The effects of this rising labor productivity might over time lead to higher overall output, and as a result offset the disemployment effect, leaving everyone better off.

Given that these outcomes are possible, you can see that the effects of raising the minimum wage are not cut-and-dry, and not entirely linear. Much depends on the economic conditions that already exist when the policy is implemented, on how high you are setting the wage, and how consumers and employers respond the higher cost of labor.

Perhaps you are not properly thinking through the implications of conditions of monopsony (or significant monopsony power) in the labor market, and how that complicates a discussion about the minimum wage?

Let me put it this way: in a monopsonistic labor market, market control by the monopsony employers does not generate an equality between the value an additional worker adds to production and the cost of hiring an additional worker.

Instead, to monopsony firms, the cost of hiring an additional worker is higher than the revenue an additional worker adds to production.

In simpler terms, the monopsonistic employer curbs their demand for labor to keep wages low. A (modest) minimum wage placed somewhere at or below the wage-rate that would clear a competitive market can correct this inefficiency–because the monopsonistic employer can no longer charge the lower wage rate, they will no longer trade a diminished demand for labor for lower wages, and thus A.) raise wages, and B.) expand employment.

Hence a discussion of the disemployment effects of the minimum wage must include a discussion of whether there is the presence of monopsony power in the labor market in question, and if so how much. You are totally ignoring that facet of the issue here, and assuming unquestioningly that monopsony power does not exist.

Yet according to the BLS, since 1973, wages in the American labor market have not risen in line with productivity; instead, productivity has risen by almost 250%, and wages have risen by less than half that. This contrasts from 1948-1973, when wages rose almost one-for-one in line with productivity.

This trend would speak far more to there being the presence of monopsony power in the American labor market than to its absence–at least since the end of the long postwar boom from ’48 to ’73. In which case the conversation about the minimum wage can’t be boiled down to the simple ‘it’s robbing Peter to pay Paul’ maxims, however much you’d like it to be.

It is similarly muddle-headed not to consider the possibility that a firm or, indeed, an industry could absorb higher labor costs imposed by a minimum wage by hiring less but raising productivity per worker, and that this higher level of productivity has the potential to mitigate the disemployment effect.

But if actually considering all angles of the minimum wage issue makes you uncomfortable, by all means call me a ‘troll’ and carry on. It is easier than thoughtful critique.

Apparently it’s the latter. I urge you to learn the meaning of the following words before you use them in economic discussions, as it’s clear you don’t know what they mean, and you are using them wrong.

1.) monopsony

Just as monopoly means there is only one seller (or a cartel of sellers) of a good or service in the market so that seller can control availability of that good or service, and thereby control the price, monopsony means there is essentially only one buyer of labor in a market, so that that buyer can dictate the price of labor.

Surely you’re not suggesting that thousands of individual fast food restaurants, including Mr’s Johnson’s pizza shop, competing against each other for consumer dollars, somehow have a monopoly on the number of jobs available so that they can dictate the price of labor.

In reality employers must pay an employee enough to attract that employee away from every other job that the qualified employee might consider, among various jobs at competing businesses.

2.) – productivity

Productivity is a measure of the ratio of input to output. More output for less input is an increase in productivity.

An increase in productivity requires adding capital to the process in the form of technology and processes that allow the same or fewer inputs to produce more output. While the worker may gain valuable skills in the process, the bulk of the increase results from the infusion of capital. A human worker can’t , say, triple his output per hour by working three times as fast or three times as hard. If he could, he would justify three times the pay, but it’s just not physically possible.

Consider the case of a worker digging a hole with a shovel vs a worker digging a hole with a backhoe. The worker with the backhoe may be 500 times as productive as the person with a shovel, but almost all of the increase is due to the capital investment in a backhoe, and the bulk of the increased price charged for digging a hole that much faster belongs to the owner of the capital, not the worker.

“Let me put it this way: in a monopsonistic labor market, market control by the monopsony employers does not generate an equality between the value an additional worker adds to production and the cost of hiring an additional worker.”

No, you are describing the Marginal Product of Labor, not monopsony. Look up those terms for yourself.

“Instead, to monopsony firms, the cost of hiring an additional worker is higher than the revenue an additional worker adds to production.”

That’s not correct. I’ll bet you can’t name a firm with monopsony power. It sure as hell isn’t Mrs Johnson’s pizza shop.

“ A (modest) minimum wage placed somewhere at or below the wage-rate that would clear a competitive market can correct this inefficiency …”

First of all, why do you believe it’s the role of government to manipulate the market for labor with price controls – unless you think government should control prices for all goods and services? That would lead to a different discussion.

Then, to the point, you do understand that a price floor placed below the prevailing market rate has no effect, right?

“–because the monopsonistic employer can no longer charge the lower wage rate …”

“… they will no longer trade a diminished demand for labor for lower wages, and thus A.) raise wages, and B.) expand employment.”

If I understand this correctly, you are saying that when the price of something goes up, consumers of that something demand MORE of it. Demand curves – at least the demand curve for labor – slope upward. Is that actually what you wrote and what you believe?

“Hence a discussion of the disemployment effects of the minimum wage must include a discussion of whether there is the presence of monopsony power in the labor market in question, and if so how much.”

OK, there is not monopsony power in the labor market in question. Let’s move on.

“ You are totally ignoring that facet of the issue here, and assuming unquestioningly that monopsony power does not exist.”

Monopsony power does not exist in the market for low skilled, fast food workers. I am ignoring an issue that doesn’t exist.

“Yet according to the BLS, since 1973, wages in the American labor market have not risen in line with productivity; instead, productivity has risen by almost 250%, and wages have risen by less than half that. This contrasts from 1948-1973, when wages rose almost one-for-one in line with productivity.”

I covered this topic previously.

“This trend would speak far more to there being the presence of monopsony power in the American labor market than to its absence–at least since the end of the long postwar boom from ’48 to ’73.”

No, this trend would speak to a higher rate of increase in productivity and a trend among employees to take more of their income as benefits instead of cash wages.

“ In which case the conversation about the minimum wage can’t be boiled down to the simple ‘it’s robbing Peter to pay Paul’ maxims, however much you’d like it to be.”

Actually it’s exactly that simple, as I’ve previously explained. If Alex’s employer is forced to pay him more than Alex can produce for the employer, that extra pay must come from someone else. There is no magic raising oneself up by one’s bootstraps.

“It is similarly muddle-headed not to consider the possibility that a firm or, indeed, an industry could absorb higher labor costs imposed by a minimum wage by hiring less but raising productivity per worker …”

Well, that’s EXACTLY what they will do. They will hire less, leaving those people who might have gotten jobs at the previous wage standing on the sidewalk. The employer will invest in technology instead, to boost the productivity of the remaining workers in order to justify their higher pay. Those remaining workers will be the most valuable of the employers workers of course, leaving the less promising ones in the dust.

“… and that this higher level of productivity has the potential to mitigate the disemployment effect.”

Umm – no, no it doesn’t. Higher productivity means more for less, remember? That means LESS labor. Higher productivity provides the same output for LESS labor. That’s what those self serve kiosks in McDonalds and other restaurants mean. Less labor required. That’s what raising the min wage does. It makes using machines and automation cheaper in comparison to using labor.

“But if actually considering all angles of the minimum wage issue makes you uncomfortable, by all means call me a ‘troll’ and carry on. It is easier than thoughtful critique.”

I have considered all angles of the minimum wage issue, and find it is a disaster for young, unskilled workers in particular – the very people who need to get work experience and learn skills and who won’t even be able to start learning if they are forbidden to work at a wage rate commensurate with the value they can produce.

A ‘pure’ monopsony, of course, involves only one buyer–but the existence of monopsony power (the ability to use a degree of market power to exert a degree of control over the price sellers sell a commodity to a buyer at) or *monopsonistic* competition in a labor market merely requires an imperfectly competitive labor market with a large disparity between the number of buyers (i.e., employers) and sellers. (laborers) It is entirely possible for this to happen in a large market, or several large markets, such as, say, the local fast food industry–so long as the number of fast food restaurants is sufficiently dwarfed by the number of people seeking a job in the fast food industry, and perfect competition is not in place. Under these conditions, the firms in the local fast food industry can indeed wield degrees of monopsony power, and fail to generate the necessary equality between marginal revenue product and factor price.

As for productivity, I would argue you are very much understating how entangled the relationship between capital in the form of technology and labor really is in producing more per unit of input. Without a labor force skilled enough to use new technologies effectively, said technologies will do very little to increase productivity. The increase in productivity comes from a joint process of higher-skilled workers enabling the productive capacities of newer technologies–saying “most of it comes from the infusion of capital(i.e., the new technologies themselves), and thus most of it belongs to the owner of the capital” is not only speculative, but I would say fails to understand the complex nature of what causes productivity to expand, and how interdependent new technologies are with the technological know-how of labor.

And while a worker can’t triple their output by working three times as fast, they *can* triple their output by developing skills that are three times as productive. And that is what has been going on, even in low-skilled occupations, all throughout the period in question (1973-present). The understanding of modern technology and how to operate it that even the average MacDonald’s worker has today are skills several orders of magnitude more productive than the skills possessed by the average MacDonald’s worker of even just ten years ago.

Which brings us back to my whole point about productivity–that while the amount that labor produces per hour in the US has risen precipitously since 1973, the amount they are compensated per hour has not.

In a properly functioning capitalist economy, with properly competitive labor markets, this sort of disparity should not happen–market forces should enable workers to demand more for their increased output and enhanced skillset, and employers should be obliged to provide them more for increased output, else they undermine their own workforce.

But this has not happened. You may try to argue that the labor market is still in equilibrium and that it’s all to do with some other factor, like technology doing more of the work–but this trend of technology doing an ever greater amount of the work humans used to do alone existed from 1948-1973 as well.
And yet this disparity between output per hour worked and compensation per hour worked did not exist. So a more likely case is that the labor market is not perfectly competitive–one can think of a variety of reasons why, the collapse of unions being one–and in this disequilibrium state, the monopsony power of employers has grown.

What is never ever mentioned is what happens to the wages of those alreadyat the $15 per hour level (due to their already-acquired skills)? Will they not demand to be paid more than the newbies with no skills? And this just ripples up the chain.

What about a discussion about what happens at the other end of the pay scale : The Aussie mining industry . Diesel mechanics : AUD $95/hour. Geological field hands ( no quals necessary ) AUD$45/hour.
Experienced RC and Diamond Drillers AUD$2,500/ day.
Senior Exploration Geologists and Field Metallurgists : AUD$2,500 / day. Plus all meals, accom, flights and taxi fares to and from the job, included in the package and a new Toyota Landcruiser supplied. We are coming into summer, which is traditional time for having a break from exploration as it’s too hot in Australia, and yet, there are 1000 + geological exploration jobs on the boards in Australia. These guys and girls all do a stint, and then buy new SUVs and RVs. Seems to me if you want your economy to work properly, you need to focus on digging some very big holes in the ground. And buying new vehicles with the proceeds. Also the Royal Flying Doctors Service in Australia just bought 4 brand new business jets, selected for their capacity to fly from rough strips, and the money was donated by Big Mining.

Mark, Ron
When I talk about an increased minimum wage I’m referring to changes at the state or federal level not just at the pizza shop. If all low wage workers see a wage increase this increases overall demand. Maybe the pizza shop won’t sell more pizza due to location or fewer low wage workers in that area but overall spending in the wider area will increase. Low wage workers are less likely to use the extra cash for saving or investment so demand goes up. You don’t agree with this?
The other thing is that I don’t believe that economics is a zero sum game as you seem to think. I don’t claim to be the scholar here. I’m just trying to understand a very complex field.

No it doesn’t. Increased production causes increased demand. There is no increased production when you merely slip extra dollars into a worker’s pocket.

“Maybe the pizza shop won’t sell more pizza due to location or fewer low wage workers in that area but overall spending in the wider area will increase. Low wage workers are less likely to use the extra cash for saving or investment so demand goes up. You don’t agree with this?”

Your first sentence? No. If more cash was all that was needed for higher economic growth, we could all just add a zero to the numbers in the corners of each bill in our wallets and we would all be fabulously wealthy.

The answer in this case is “somewhere else” meaning out of someone else’s pocket.

“The other thing is that I don’t believe that economics is a zero sum game as you seem to think. I don’t claim to be the scholar here. I’m just trying to understand a very complex field.”

You are right. Economics ISN”T a zero sum game. Trade – including working for money – always makes both parties to the exchange better off or they wouldn’t do it.

But in the case of a mandated min wage increase, the employer is just forced to fork over more money for no additional value from the employee. That extra compensation must come from someone else’s pocket, meaning that someone else has less. It’s just moving the furniture around without creating anything new.

Economic growth requires increases in productivity. More output for less input, not just moving money from one pocket to another.

Unfortunately Mr. Williams only explained one aspect of the destructive effects of the minimum wage, and it isn’t even the most significant factor.

For example, he appears to assume that the reduction of incomes for employers is directly proportional to their future spending. Reality is far more complicated. If a company can increase prices to cover their loss, everyone, even the minimum wage recipient, loses. Or as I always put it, no one has ever benefited from a minimum wage increase, and everyone pays for it. The negative effects of the minimum wage are incalculable, but the positive effects of the minimum wage are – they’re zero.

If I was a mechanic at a Ford dealership, and my pay doubled overnight, I would buy a Ford Ranger, without blinking. I would drive it up the road and get a hydraulic crane fitted and a powered lift gate fitted. This will save me a fortune and everyone else will save money on future spinal surgery costs. Not discussed anywhere above is the problem of sluggish sales in a saturated marketplace caused by an aging population with bad backs, which is the reality of today. ( see P.J. O’Rourkes brilliant concise comment on what caused the GFC { 1945 + 65 = 2010} – boomers just prior to retirement age started pulling their money out of various markets, to buy new hips, and other bits.) We are drowning in every conceivable product , with the possible exception of a Space Shuttle Program and a reboot of the supersized Buick Roadmaster wagon ,there are waiting lists for spinal, knee, hip surgery, caused by a failure to use sensible manual handling lifting assistance equipment over the last few decades, and in my opinion, that is what is holding growth back. A renewed sense of optimism in NASA would galvanise society, as it did in Reagans time in office, and people will start spending money on gadgets again. ” As used by astronauts ” is a great sales pitch. In Australia we raise mining industry wages, and ancillary services follow, and it works. There’s no point, in my opinion, agonising over minimum wages discussions when the one thing we are definitely going to start running low on is young workers seeking a minimum wage. There will be a decreasing number of young nurses to care for an increasing number of old nurses in nursing homes. The shortfall must be made up with gadgets that will need to take over all the hard work. Otherwise the remaining young nurses will be overworked and the job won’t get done. So buy more labour saving devices. This is and always has been a technology application discussion, as my first class honours medical doctor brother describes modern medicine. The only way forward is to provide young workers with all possible labour saving and productivity increasing equipment that there is available in the marketplace. Young workers productivity in any industry will therefore only ever increase, so therefore , there will be a bit more money available to pay them a bit more. But the main thing is that the workers themselves must not be worn out as previous generations of workers have been from a lack of modern labour saving devices. Because this is the first time in history where we will not be able to replace the workers. We won’t be sourcing them from the Philippines or what have you- as has been done in the past, they have an aging population as well. This question needs to be handled carefully and thoughtfully. Robotic vacuum cleaners, robotic lawnmowers, wheelchair hoists, mounted on big SUVs, Lincoln Inpinger pizza ovens mounted in trucks, and NASA level technology applied to the mining industries will keep us out of trouble. Let NASA ergonomics engineers and pizza shop managers run the economy in my opinion.

The writer appears to assume that an increase in the minimum wage is nothing more than a reduction for others when, in fact, it’s far more destructive.

Aside from increasing costs to employers and discouraging hiring, it’s likely one of the biggest causes of inflation – which we will all pay for. So a family without a minimum wage earner, might actually lose because of a minimum wage increase by having to pay more for goods and services.

There’s also the dampening effect it will likely have on future increases for other workers, the less discretionary money businesses will have, and the fact that even if minimum wage workers do spend their gains, it’s no guarantee that businesses will benefit across the board.

But in my opinion, the single biggest revelation of the minimum wage is that it shows that economists in general are charlatans, frauds, incompetents and just plain ignorant.

In my experience high wages are a good idea , as long as most of the money sits in the bank, waiting to be invested in equipment manufacturing companies, and when it is spent, it’s spent on decent pick up trucks, and specialised equipment for the individuals field of work. More drill rigs, and medical equipment, earthmoving machines, and emergency services vehicles.

Australia has high workers wages , and it gets plowed straight back into buying labour saving technology. Exploration geologists like me buy expensive gadgets to do everything. Attempting to eliminate manual labour jobs by replacing people with machines creates more jobs. Because mining in Australia is spread out and isolated, technology uptake is very high , by necessity. And the industry pay levels are very high. All the technical people keep buying more technology, which boosts productivity.

Minsky,
I’m not real familiar with the concept of monopsony but your replies are helpful in understanding it. Given the BLS data you refer to do you think it can it then be said that the growth of GDP has been slower than if the min. wage had kept up to productivity growth?

It’s actually not about the minimum wage *itself* keeping up with productivity growth–it’s about the minimum wage reducing monopsony power so that *employers* are induced to set their wages in line with the growth in the productivity of their labor force.

But to your question, yes, I think GDP growth has been limited by wages failing to rise in line with overall productivity as they did in the early postwar era. We certainly saw higher rates of growth in that era than we’ve seen since the 1970s.

But it also hasn’t been limited in a totally linear way. What has happened is that, because workers have not been able to rely on their wages to keep pace with the cost of living, and because producers still needed some source of demand to buy the goods created by rising levels of productivity–but did not want to fund it via higher wages–the financial industry has extended massive amounts of credit to workers and helped facilitate higher levels of private borrowing to make up the difference and provide ‘artificial’ demand. That is why, just before the Great Recession, the private debt-to-GDP ratio stood at 300%.

In the initial stages, the financial industry had difficulty doing this due to the capital controls instituted in response to the Great Depression. This is the source of the ‘stagflation’ of the late 1970s. As productivity and wage growth began to decouple, with the latter rising slower than the former, workers could not buy the ‘excess’ production, and the economy slowed. This was ‘remedied’ in the 1980s by the push for the deregulation of the financial system, which repealed the last of the safeguards in the financial system imposed on it after the Depression. Freed of these safeguards, the financial industry could now extend enough credit to workers to fuel a credit bubble that would paper over their inability to buy enough goods from expanded production out of wage growth alone to achieve high growth rates.

This was the source of the 1980s-1990s boom (the ‘Great Moderation’, as it was called) and the ultimate cause of the 2008 depression. Private borrowing accelerated
massively from 1985-2008, rising from 120% of GDP to over 300% of GDP in just over twenty years. Contrast that to the growth in credit from 1945-1985, where it took four decades for the private debt to GDP ratio to grow from 40% of GDP to just over 120% of GDP. Once workers exhausted their capacity to borrow more to compensate for their diminished wages, they had to deleverage on a massive scale–thence the contraction of 2008 and the subsequent debt deflation, which has kept growth at anemic levels ever since.

So, over the long term, while GDP growth was higher during the debt-fueled bubble period, all those gains were essentially wiped out by the collapse of the bubble and the long period of deleveraging we find ourselves in. To put it simply–yes, overall GDP growth has been slower than if wages had kept pace with productivity, but this has been masked by short-term, credit-fueled upswings in GDP growth along the way, so at times it has not been so obvious that it has been slower.

Sorry Perry,
Your example of a shopkeeper seems designed to obscure the reality of unequal bargaining power by putting forth the least unequal example.
You miss the real point of the minimum wage: to set a lower limit on employer predation via bargaining power. Even your virtuous shopkeeper was forced to be a real prick sometimes, especially when undercapitalized or when being outcompeted. The unsuccessful shopkeeper of today now gets to use bankruptcy court or a going-out-of-business sale, but critically doesn’t get to use a vulnerable person. We don’t let her, any more than we let a larger employer invade an employee pension plan when her auto business becomes less competitive. (Remember Studebaker?). 19th century to mid-20th century exploitative capitalism has gone the way of the dodo, and good riddance to it–and to your insane revanchist ideas.

As some have stated, when the MW is raised it is usually followed by wage hikes throughout. Something I haven’t seen mentioned is the effect this has on global competitiveness. It’s already difficult to compete against overseas companies paying a few dollars per day. If we want to keep and expand our manufacturing, we need to be aware of this.